Accounting 9706 · AS & A Level · Costs and cost behaviour

Costs and cost behaviour — practice question

DP Limited is a large manufacturing and retailing company. The following data are provided: Current selling price per unit $3.60; Current weekly sales 2000 units; Contribution margin 45%. The directors intend to run a four week price promotion on its most popular product. They plan to cut the selling price of the product by 20% for the entire four weeks of the promotion. They predict that extra sales of the product will reach 150% of the current sales. The company will face additional fixed costs of $6000 to carry out the promotion. The directors expect unit variable costs to stay unchanged from their present level.
(a)[2]

Calculate the total contribution the company would generate over the four-week period.

(b)[2]

Calculate the total forecast number of units to be sold if the directors go ahead with the promotion.

(c)[7]

Calculate the additional profit or loss if the company goes ahead with the promotion.

(d)[4]

Calculate the percentage by which current unit sales have to rise for the promotion to break even.

(e)[5]

Advise the directors whether they ought to proceed with the promotion. Support your answer with both financial and non-financial factors.

(f)[2]

Explain what the purpose of cost-volume-profit analysis is.

(g)[4]

State four assumptions that apply in cost-volume-profit analysis.

(h(i))[2]

Calculate a suitable overhead absorption rate for the business.

(h(ii))[2]

Explain one drawback of absorption costing.

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